Italy: New government must build on recent reforms

02/05/2013 - Italy has made considerable progress in strengthening its public finances and adopting wide-ranging reforms to boost economic growth. The new government must build on past achievements and ensure that they are sustained and reinforced, says a new OECD report.

The latest Economic Survey of Italy says implementation of the key 2012 reforms aimed at improving the dynamism of labour and product markets must be implemented effectively. This will improve Italy’s persistently weak productivity and boost the country’s international competitiveness, the report says.

Poor competitiveness, a drop in bank lending and the immediate impact of public spending cuts and tax rises on households and businesses continue to undermine growth in the short term. The report forecasts GDP to fall by 1.5% this year before inching up by 0.5% in 2014.

Presenting the report in Rome, OECD Secretary-General Angel Gurría said: “Amid recession and rising unemployment it is sometimes difficult to see light at the end of the tunnel. But I am convinced that a commitment to the current reform strategy will result in better living standards and a stronger, more dynamic Italian economy. ” (read the full speech)

The report says maintaining fiscal consolidation is key to putting Italy’s debt-to-GDP ratio on a downward path over the medium term. Budgetary measures should concentrate on permanent spending cuts to avoid already high levels of taxation. Restructuring the tax system is necessary to reduce inefficient expenditure and to make compliance simpler and cheaper. Taxes on low-paid workers are higher than in most other OECD countries, the report says. Lowering tax rates of second earners in families would help tackle the low participation rate of women in the Italian labour market.

The immediate task of the new government should be to implement fully recent reforms, monitor their impact and make improvements where needed. High on the list is ensuring the planned Transport regulator is established rapidly and that the Competition authority makes effective use of its new powers.

The OECD recommends a number of ways in which the reforms can be broadened. They include:

removing remaining regulatory restrictions that undermine competition in retail and professional services;

making the labour market more dynamic by providing more support for job-seeking and training and providing a broader social safety net;

aligning wages more closely to productivity, through negotiations with social partners.

The report also recommends ways of tackling potential obstacles to effective implementation of laws and regulation. The report calls for greater simplification and transparency, increased use of performance-orientated management and a streamlining of court processes.